Rising Star Buy: TripAdvisor

For my Rising Star Portfolio, I'm going to buy shares in the recent Expedia (NAS: EXPE) spinoff TripAdvisor (NAS: TRIPV) (NAS: TRIP) . The new company offers fast growth, high margins, and exposure to the single-largest category of Internet purchases, travel. And this corporate action also unlocks value in the previously captive TripAdvisor.

The businessTripAdvisor operates a free online travel-research website, helping consumers plan their ideal trip with the use of user-generated reviews of destinations, hotels. and other accommodations. The company operates in 30 countries and 21 languages and has two sites in China that are just gearing up.

The sites offer more than 50 million reviews, and the company operates the leading online travel platform, with 44 million unique monthly visitors to its flagship site in September. That content draws consumers to the site, where TripAdvisor monetizes that traffic with cost-per-click advertising (79% of sales in 2010), display ads (15%), and subscriptions (6%).

The value for consumers comes in the form of reviews from real consumers, not corporate spin. For advertisers, value comes from the high-quality leads the site provides.

TripAdvisor is just venturing into vacation rental properties, a sector where HomeAway (NAS: AWAY) plays. It's a massively fragmented sector, leaving room for a leader to move in.

And with the U.S. still comprising 62% of sales, the company still has a huge opportunity globally, as priceline.com's (NAS: PCLN) rapidly growing international sales show. At priceline, international comprises some 80% of revenue.

Why I'm buyingI estimate the stock is trading at 12 times 2012's EBITDA, which I value using the midrange of management's long-term EBITDA guidance of 42%-47%. That multiple of 12 would be considered expensive for most consumer-focused businesses, but TripAdvisor offers powerful scale and requires low capex, meaning it can produce huge cash flow and margins. And with its substantial growth opportunities, I expect the company to generate high sales growth for a number of years.

I'll be buying $1,000 of TripAdvisor on the next market day, attempting to take advantage of the change in liquidity that should occur when the stock moves from its current "when-issued" status to regular-way trading next week.

In addition, the stock is being added to the S&P 500 on Tuesday's close, so index funds will be compelled to buy shares regardless of price. That's a double-whammy of catalysts.

And the spinoff of the company allows investors to have direct access to TripAdvisor's high growth, which is no longer inside the slower-growing and lower-margin Expedia.

RisksNaturally, TripAdvisor's high margins are attractive, but it's the clear leader in this niche space. Still, there are risks from portal operators such as Google and Microsoft that are focused on ad revenue. Both those behemoths have increasingly moved into localized content since it pays better, and any big move into TripAdvisor's domain could be problematic. For now, though, those portals just don't offer the depth of content that TripAdvisor's sites do.

Given the high multiple, the company will have to show compelling sales growth, so if we see a stumble there, the stock could come tumbling after.

SummaryTripAdvisor offers a fast-growing way to ride the wave of travel, a sector that dominates e-commerce. With its high margins, scalability, and huge opportunities, I expect shares to do well.

At the time this
article was published This article is part of ourRising Star Portfoliosseries, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of ourRising Star analysts(and their portfolios).Jim Royal, Ph.D., owns shares of Microsoft. The Motley Fool owns shares of Google and Microsoft.Motley Fool newsletter serviceshave recommended buying shares of priceline.com, HomeAway, Microsoft, and Google and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.